China: Strong credit and money growth – Nomura

Research Team at Nomura, suggests that China’s strong credit and money growth has reduced the likelihood of monetary policy easing in the near term.

Key Quotes

“Credit surged in January, by far more than expected, with aggregate financing expanding to RMB3.42trn from RMB1.82trn in December (Consensus: RMB2.2trn; Nomura: RMB2.7trn; January 2015: RMB2.0trn). Growth of the outstanding stock rose to 13.3% y-o-y from 12.4%. The rise in aggregate financing was led by new RMB loans, which jumped to RMB2.51trn in January (Consensus and Nomura: RMB1.9trn; January 2015: RMB1.47trn). In addition, net bond financing, net equity financing and shadow banking activity all rose significantly in January.

A number of factors likely contributed to the strong credit expansion:

• Credit to corporates (especially medium- to long-term loans) accounted for a big portion of the surge. This could be partly due to a shift from foreign currency-denominated debt (both onshore and offshore) into RMB-denominated debt by corporates given expectations of a weaker RMB. Indeed, the outstanding amount of foreign-currency loans extended by domestic banks has fallen by more than USD110bn from its peak in July 2015.

• Credit demand tends to be seasonally strong at the beginning of the year as fresh new loan quotas allow some projects that faced funding delays the previous year (as quotas were fully met) to restart in January.

• We believe loans to local government financing vehicles surged again as more infrastructure projects are launched this year – the first of the 13th Five-Year Plan.

• We expect strong credit demand from households for mortgages as property prices continue to rise and policy around home purchases is eased.

M2 growth also rose by more than expected, to 14% y-o-y in January from 13.3% in December (Consensus: 13.5%; Nomura: 13.2%). Strong M2 growth was mainly driven by rapid credit expansion. Moreover, the almost RMB2trn of liquidity injections by the People’s Bank of China (PBoC) has secured ample interbank liquidity, allowing commercial banks to grant more new loans.

The strong credit and money data also reflect accommodative fiscal and monetary policy, which could help maintain infrastructure investment growth at a relatively high level, and property sector destocking. However, we do not think this can fully offset the headwinds from the severe overcapacity problem in upstream industries and oversupply in the real estate sector. Hence, we continue to expect growth to slow in 2016 and forecast annual GDP growth of 5.8%.

The strong credit and money growth should reduce the likelihood of a wholesale easing in the near term, in our opinion. In January, senior PBoC officials expressed a preference for liquidity injections over cuts to the reserve requirement ratio (RRR) or benchmark interest rates in the short term. However, given the downward pressure on the economy and continued capital outflows, we believe the PBoC will eventually find it necessary to resort to RRR or benchmark rate cuts. As such, for this year we maintain our forecast of four RRR cuts (50bp in each quarter) and two benchmark interest rate cuts (25bp in Q2 and Q3).”
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